Just as choosing a legal structure (limited liability company vs. sole proprietorship), choosing between being a VAT payer and a non-VAT payer is crucial when starting a business. The difference between the two options, depending on the type of customer, can be as much as 40% of your profit, depending on whether or not you are a VAT payer and to whom you sell your goods or services.

Calculation Between a VAT Payer and a Non-VAT Payer

The first and probably most important criterion is to choose a solution that won’t result in a loss for you, regardless of who you sell to or buy from, taking into account whether or not you are a VAT payer. As with other analyses, the more information you have, the more accurate the result will be regarding whether or not you should be a VAT payer. In most cases, however, the following applies:

You must be a VAT payer

• I purchase goods or services from a taxpayer and sell them to VAT taxpayers
• I sell services only, or almost exclusively, to VAT-registered customers
• A large portion of my sales includes VAT, and I also sell to VAT-registered customers

For your consideration

• If the ratio of my customers is roughly even (paying vs. non-paying)

Definitely not a VAT payer

• I provide services to non-VAT payers
• I sell goods and services to non-VAT payers at a high markup

If you plan to make significant investments at the start of your business—such as renovating your premises, purchasing machinery and equipment, or buying a motor vehicle—the criteria listed above will further favor VAT payers.

Bookkeeping and VAT Filing

According to the Accounting Act, accounting should be done on an accrual basis. In reality, however, especially when accounting is handled externally, entries are made on a monthly basis or at even longer intervals. For VAT payers, it is necessary to maintain monthly accounting records, as there is a legal obligation to file VAT returns monthly or quarterly, and VAT cannot be calculated correctly without accounting records. New VAT payers are required to file VAT returns monthly for the first 12 months. Subsequently, you may apply to file VAT returns quarterly if your turnover does not reach €100,000 for 12 consecutive months. If this threshold is met, you must switch back to filing monthly VAT returns.

Accounting Fees for VAT Payers

The fee for accounting services is typically calculated based on the number of accounting entries. Since a VAT payer always records the tax base and VAT separately in their accounting, this constitutes two accounting entries. Some firms charge the same price per entry but count such documents as two entries; others count them as a single entry but at a higher price (double). Additionally, with some accounting firms, you should expect an extra fee for filing a VAT return, a control statement, or a summary report.

In the TaxWise accounting software, we count accounting entries as lines in the general journal. So if you have a document that includes both the tax base and VAT, that counts as two accounting entries. If there is no VAT on the document, it counts as one accounting entry. There is no charge in TaxWise for filing VAT, corporate income tax, or social security returns.

Example of a Non-VAT Payer

Let's compare what your profit will be depending on whether or not you are a VAT payer when you buy and sell goods/services to both VAT payers and non-VAT payers.

The supplier will sell you the goods for €1,200 (if you are not a VAT payer, you will pay €1,200; if you are a VAT payer, you will pay €1,000 + €200 VAT).

You then resell the goods to an individual for €2,400. If you are a VAT payer, the price will be €2,000 + €400 VAT; if you are not a VAT payer, the price will be €2,400 (for the end consumer, it is always the price that matters; they do not distinguish whether it includes VAT or not).

Your profit will be as follows:

• VAT payer: profit of €1,000 (€2,000 in sales of goods – €1,000 in purchases of goods)
• Non-VAT payer: profit of €1,200 (€2,400 in sales – €1,200 in purchases)

In this case, it's better for you not to be a VAT payer—you'll earn €200 more.

Example: VAT Payer

How will the situation change if we sell to VAT-registered customers? First and foremost, it is important to realize that a VAT-registered customer does not view prices the same way an ordinary consumer does, but rather considers the price excluding VAT.

Therefore, if you sell to a VAT-registered customer as a VAT-registered seller, you sell the goods to them for €2,000 + €400 VAT; if you sell to them as a non-VAT-registered seller, you must sell the goods to them for €2,000—otherwise, they will prefer to buy the goods from a VAT-registered seller.

Your profit will be as follows:

• VAT payer: profit of €1,000 (€2,000 in sales of goods – €1,000 in purchases of goods)
• Non-VAT payer: profit of €800 (€2,000 in sales – €1,200 in purchases)

In this case, it is better to be a VAT payer.

If, as a non-VAT payer, you were to sell, for example, shoes to individuals in a store, you would make a profit of €1,200; however, if you closed the store and decided to supply shoes exclusively to retailers while remaining a non-VAT payer, your profit would be only €800. This is, of course, an extreme example that does not take other variables into account. In reality, the calculation includes costs from non-VAT payers, such as payroll expenses; initial investments, which may or may not include VAT; customers who may be both VAT payers and non-VAT payers at the same time; and many other factors.

Consultation

At TaxWise, we provide accounting services to more than 700 companies with various combinations of VAT inputs and outputs. We also handle approximately 15 VAT registrations per month. As a result, we can usually assess very quickly what is most advantageous for a client—or when a precise calculation is necessary.